Ecn 306, Developmental Economics, Obafemi

Ecn306

1. Course Title: Issues in Development Economics Course Code: ECN 306 Dr Monica A. Orisadare Department of Economics OAU, Ile-Ife, Nigeria

2. Module 1 The general nature of the development problem

3. 1.0 Objectives At the end of this module, learners should be able to Define development economics Trace the history of development economics Explain the need for a new economic order Identify the scope of development economics Explain the emergence of development economics as discipline

4. 2.0 Outline The meaning and history of development economics New International Economic Order (NIEO) Scope of development economics Emergence of development economics as discipline The challenges of development Factors in the perpetuation of underdevelopment Assignment

5. The meaning of development economics The study of economic development is one of the newest, most exciting, and most challenging branches of the broader disciplines of economics and political economy . Recall in your ECN 203 – Introductory Applied Economics I class; some basic concept of economics; Traditional economics is concerned primarily with the efficient, least - cost allocation of scarce productive resources and with the optimal growth of these resources over time so as to produce an ever - expanding range of goods and services . Traditional neoclassical economics deals with an advanced capitalist world of perfect markets; consumer sovereignty; automatic price adjustments; decisions made on the basis of marginal, private - profit, and utility calculations; and equilibrium outcomes in all product and resource markets .

6. Traditional neoclassical economics assumes economic “rationality” and a purely materialistic, individualistic, self-interested orientation toward economic decision making. Political economy goes beyond traditional economics to study, among other things, the social and institutional processes through which certain groups of economic and political elites influence the allocation of scarce productive resources. Development economics to a greater extent than traditional neoclassical economics or even political economy, must be concerned with the economic, cultural, and political requirements for effecting rapid structural and institutional transformations of entire societies in a manner that will most efficiently bring the fruits of economic progress to the broadest segments of their populations.

7. It must focus on the mechanisms that keep families, regions, and even entire nations in poverty traps, in which past poverty causes future poverty, and on the most effective strategies for breaking out of these traps. Consequently, a larger government role and some degree of coordinated economic decision making directed toward transforming the economy are usually viewed as essential components of development economics.

8. The history of development economics The following are some of the factors for the emergence of development economics as a discipline; i . Post-WWII theories The origins of modern development economics are often traced to the need for, and likely problems with the industrialization of eastern Europe in the aftermath of World War II-  Paul Rosenstein- Rodan ,  Kurt Mandelbaum , Ragnar Nurkse , and  Sir Hans Wolfgang Singer . Only after the war did economists turn their concerns towards Asia, Africa and Latin America. Authors such as  Simon Kuznets  and  W. Arthur Lewis  were analysts of not only economic growth but also structural transformation.

9. ii. After the 1930s: Development economics as it is commonly understood Early studies of development ‘30s-’40s Latin America;Western perspective (end of WWII): a way to study (and control, monitor) what was happening in previous colonies;“Studying the underdeveloped world”; “the late comers” In Rostow words once the America decides not to go to war with Russia or China they have to find other ways to protect their interests (a mixture of political economic and military activity). Thus, the USA need to develop a more rigorous economic policy in ASIA.

10. iii. Bretton Woods Institutions In 1944 in the Bretton Woods Conference (USA) the new rules governing the world economy were defined parallel to the creation of the UN the year after A fixed exchange rate system with the dollar as a reference currency; An International Monetary Fund (IMF), whose aim was to monitor the monetary policies of the member countries and provide short-term loans; A World Bank, who should lend money to lower income countries; these are long-term loans to support economic development; Opening of the international trade, with the GATT (General Agreement on Trade and Tariffs) which then became WTO in 1995.

11. iv. Failure of Economic theories Linear-stages-of-growth model This theory modifies Marx's stages theory of development and focuses on the accelerated accumulation of capital, through the utilization of both domestic and international savings as a means of spurring investment, as the primary means of promoting economic growth and, thus, development.  The linear-stages-of-growth model posits that there are a series of five consecutive stages of development which all countries must go through during the process of development. These stages are "the traditional society, the pre-conditions for take-off, the take-off, the drive to maturity, and the age of high mass-consumption" 

12. Simple versions of the  Harrod–Domar model  provide a mathematical illustration of the argument that improved capital investment leads to greater economic growth. Such theories have been criticized for not recognizing that, while necessary,  capital accumulation  is not a sufficient condition for development. This has led to the major criticism that the theory assumes that the conditions found in developing countries are the same as those found in post-WWII Europe.

13. v. Structural-change theory Structural-change theory deals with policies focused on changing the economic structures of developing countries from being composed primarily of subsistence agricultural practices to being a "more modern, more urbanized, and more industrially diverse manufacturing and service economy." There are two major forms of structural-change theory: W. Lewis'  two-sector surplus model , which views agrarian societies as consisting of large amounts of surplus labor which can be utilized to spur the development of an urbanized industrial sector, and Hollis Chenery's   patterns of development  approach, which holds that different countries become wealthy via different trajectories.

14. The  pattern  that a particular country will follow, in this framework, depends on its size and resources, and potentially other factors including its current income level and comparative advantages relative to other nations. However, the structural-change approaches to development economics have faced criticism for their emphasis on urban development at the expense of rural development which can lead to a substantial rise in inequality between internal regions of a country.

15. The two-sector surplus model, which was developed in the 1950s, has been further criticized for its underlying assumption that predominantly agrarian societies suffer from a surplus of labor. Actual empirical studies have shown that such labor surpluses are only seasonal and drawing such labor to urban areas can result in a collapse of the agricultural sector. The patterns of development approach has been criticized for lacking a theoretical framework.

16. vi. International dependence theory International  dependence theories  gained prominence in the 1970s as a reaction to the failure of earlier theories to lead to widespread successes in  international development . Unlike earlier theories, international dependence theories have their origins in developing countries and view obstacles to development as being primarily external in nature, rather than internal. These theories view developing countries as being economically and politically dependent on more powerful, developed countries which have an interest in maintaining their dominant position.

17. There are three different, major formulations of international dependence theory:  neocolonial dependence  theory, the false-paradigm model, and the dualistic-dependence model . The first formulation of international dependence theory- neocolonial dependence theory , has its origins in  Marxism  and views the failure of many developing nations to undergo successful development as being the result of the historical development of the international capitalist system

18. vii. Neoclassical theory With the rise of several conservative governments in the developed world during the 1980s, neoclassical theories represent a radical shift away from International Dependence Theories gained prominence. Neoclassical theories argue that governments should not intervene in the economy; in other words, these theories are claiming that an unobstructed free market is the best means of inducing rapid and successful development. Competitive  free markets  unrestrained by excessive government regulation are seen as being able to naturally ensure that the allocation of resources occurs with the greatest efficiency possible and the economic growth is raised and stabilized.

19. Within the realm of neoclassical theory, there are several different approaches each with subtle, views regarding the extent to which the market should be left unregulated. These different takes on neoclassical theory are the  free market approach ,  public-choice theory , and the  market-friendly approach . Of the three, both the free-market approach and public-choice theory contend that the market should be totally free, meaning that any intervention by the government is necessarily bad. Public-choice theory is arguably the more radical of the two with its view, closely associated with  libertarianism , that governments themselves are rarely good and therefore should be as minimal as possible.

20. The market-friendly approach, unlike the other two, is a more recent development and is often associated with the  World Bank . This approach still advocates free markets but recognizes that there are many imperfections in the markets of many developing nations and thus argues that some government intervention is an effective means of fixing such imperfections.  

21. New International Economic Order (NIEO) The New International Economic Order (NIEO) was a set of proposals put forward during the 1970s by some developing countries through the   United Nations Conference on Trade and Development  to promote their interests by improving their Term of trade by increasing exports from the third to the first world transfers of capital to the third world, transfers of technology to the third world increased development assistance , as well as provisions for increasing aid and to alter the international monetary system developed-country tariff reductions, and other means. It was meant to be a revision of the international economic system in favour of  Third World  countries, replacing the  Bretton Woods system , which had benefited the leading states that had created it – especially the  United States . This order was demanded by the  Non-Aligned Movement .

22. Scope of development economics The following are examples of some of the need behind studying development and what is to be studied in development economics: Problem of World Poverty Meaning Of Economic Development Models Of Economic Growth Theories Of Under-Development And Development Problems Of Population (Population explosion- limited resources, unemployment, migration, urbanization and environment )- Optimal population?

23. Dualistic Theories- i.e., they have a few developed cities and so many backward cities, use of capital intensive technologies along with rising unemployment; and the existence of mass poverty accompanied by a few rich etc World Development Institutions and Foreign Aid

24. Scope of development economics Cont’ The following are some of the questions addressed in development economics: 1. What is the real meaning of development ? Do the Development Goals fit with these meanings? 2. What can be learned from the historical record of economic progress in the now developed world? Are the initial conditions similar or different for contemporary developing countries from what the developed countries faced on the eve of their industrialization or in their earlier phases?

25. 3. What are economic institutions, and how do they shape problems of underdevelopment and prospects for successful development? 4. How can the extremes between rich and poor be so very great? 5. What are the sources of national and international economic growth? Who benefits from such growth and why? 6. Why do some countries make rapid progress toward development while many others remain poor?

26. 7. Which are the most influential theories of development, and are they compatible? Is underdevelopment an internally (domestically) or externally (internationally) induced phenomenon? 8. What constraints most hold back accelerated growth, depending on local conditions? 9. How can improvements in the role and status of women have an especially beneficial impact on development prospects? 10. What are the causes of extreme poverty, and what policies have been most effective for improving the lives of the poorest of the poor?

27. Recap This module looked at the definition development economics; Trace the emergence and history of development economics as a discipline Identify the scope of development economics Some of the questions addressed by development economics

28. Assignment Distinguish between traditional economics, political economics and development economics Mention some factors responsible for the development of development economics as a discipline Identify five scope of development economics State three major question that development economics addresses

29. Thank You